Digitalwall: VoIP (2) Who Depends on Whom

The ball is always on the hand of telecom operators.

[+] Feasible profit model of Skype

Where is Skype, a free VoIP service provider, going to make money? It's been a decade since the Internet revolution, nobody would be so naive to provide free service forever and depend on advertisements for revenue.

Will Skype charge monthly fees some day? Similarly, after a decade of the Internet revolution, nobody would be so naive to charge monthly fees for such a service. Anything that was once free would never be charged for, otherwise ICQ, MSN and Yahoo! would have done it years ago.

That leaves Skype only one thing to collect fees for: the phone call service between Skype and traditional PSTN. Consumers have formed their mindset that phone calls between computers are free. However, if you call a telephone number through a computer, you will have to pay - whether that's a local landline number or a mobile number.

For this reason, Skype has launched SkypeOut, which allows the users to dial conventional phone numbers and charges them fees by minute. Consumers buy pre-paid points on its website and make phone calls with those points. There is also a detailed list of tariff for the service on the website.

With such a profit model, Skype, far from being a challenger of the traditional telecom industry, has to depend on the latter for living at the current stage. Having understood this, you will see that the media has over-exaggerated the so-called VoIP "revolution".

[+] A complicated landscape in the telecom industry

In almost every country, telecom operators are classified into two types: Type I and Type II. Although telecom regulations of different countries have different definitions for the two terms, in general, the business scope of the Type I telecom operator mainly involves the distribution and construction of telecom infrastructures.

For example, fixed line telecom operators spend a lot of time and money in laying cables along roads and in mountain areas till they reach each household. On the other hand, mobile operators have to build their base stations and sell phone numbers to enable subscribers to make phone calls wherever they are.

There are various kinds of the Type II operator. They mainly provide value added services based on the infrastructures of the Type I operator. For example, the ADSL ISP is one of such operator, which includes, for instance, Seednet and Sonet in Taiwan, who provide the Internet access service via the landlines of Chunghwa Telecom.

An easier distinction between the two types of telecom operator is the fact that the Type I is able to provide the subscribers with phone numbers, while the other is not. If you install a fixed phone set at home, you will get a fixed phone number; if you use mobile services, you will get a mobile phone number then. All these numbers are allotted to the Type I operator by the government.

The Type I operator assign the numbers to subscribers, who can therefore make phone calls and will receive bills for that. The "product" that the telecom operator sells is the "minutes of a phone call". The rate for a "minute" sold to public consumers may be called "retail price".

The Type I operator may also sell large amount of "minutes" to the Type II operator, who, in turn, sells them to public consumers, and this kind of business is known as voice resale. Of course, the Type II operator could get the minutes with lower prices, which are called "wholesale price".

[+] Skype relies on wholesale minutes prices

For example, if the retail price that a Type I operator offers public consumers is 4 dollars per minute, and the wholesale price that it offers a Type II operator is 2 dollars per minute, the resale price offered by the Type II operator might be 3 dollars per minute to public consumers. In this case, the Type II operator would earn 1 dollar for each minute sold.

So we can often see many Type II operators selling phone cards with a rate even lower than that of the Type I operator. The reason is that the Type II operator can get minutes at the wholesale price from the Type I operator.

When a consumer makes a call through such a service, he/she must dial a given number first, enter his/her user ID and password, and then the actual phone number he/she wants to dial after an authentication process. When the call is connected, the person is actually talking with the other one via the phone line provided by a Type I operator. While the Type II operator sells the card, it is the Type I operator that actually connects the call.

With the Type I operator's retail price of 4/minute, isn't the Type II operator challenging back with its resale price of 3/minute? As a matter of fact, the Type I operator is not worried at all, because it believes that the wholesale of minute to the Type II can bring it more income.

And to be frank, the price that the Type II operator offers public consumers are completely controlled by the Type I operator. In order to maintain the market order, the Type I operator will not reduce its wholesale prices at will. It is the Type II operator that, due to severe competitions, often has to suffer a narrow margin.

[+] The ball is on the hand of telecom operators

SkypeOut can enable calls to conventional phone numbers only because it has negotiated a "wholesale" price with the telecom operator. As the telecom operator has sold the minutes to Skype at considerably cheap prices, Skype could charge its customers with a relative low price. Eventually, the money has fallen back into the pockets of the telecom operators.

Type I operators around the world are either unwilling, or not allowed to do businesses with Skype, forcing the latter to buy minutes from Type II operators. Although Skype could get wholesale prices for its large orders, its profit margin is even narrower after rounds of resale. The money eventually will fall back into the pockets of telecom operators.

VoIP is an inevitable trend. Yet the transition will be completed slowly under the control of telecom operators. In addition to the price, there're also the issues of numbers (Skype does not have a number and, therefore, cannot receive calls) and handset subsidies in the case of mobile communication. The ball is always on the hand of telecom operators. (
2004/12/05 - By Digitalwall.com - Way to
China Internet/Telecom )